After reading the chapter on “Pricing Information” by Shapiro and Varian, one critical question for me came up: How ethical are price discrimination strategies? Isn’t discrimination illegal?
It has become a puzzle to figure out what influences the prices of airline tickets: Is it influenced by the day of the week you book them, the identification of demand for this destination & date via the search history of your IP address or the fullness of the plane’s capacity? The main struggle for me lies with the second option that depends on your behavior and data. Perhaps even more data is used from your google profile to identify your personal traits and spendable wealth! There is no transparency to the calculation of these prices, causing frustration amongst customers.
Isn’t increasing a flight price by 25% because you looked at this offer once before at your IP address the same thing as increasing the price of those bananas you buy every week? Isn’t it frustrating when the person next to you gets to pay a different price for the same good? I believe price discrimination is unfair in either case. I worry especially for discrimination on demographic factors such as sex or race, but also for perceived wealth as this can falsely drive up flight prices with people that can barely afford them. Luckily, gender-based pricing, also called the ‘woman-tax’ or ‘pink-tax’, is actually banned in California after research pointed out pink razor blades for women were sold at a higher price than black or blue razor blades for men (Willett, 2017).
I understand that price discrimination is necessary and beneficial in many cases, but it should always remain transparent and ethical. The aviation industry should be clear about the factors that influence pricing as to not cause illegal discrimination concerns, general frustration or costs of unclarity such as extra baggage fees (Charlton, 2017). One-to-one marketing and personalized pricing should be used with caution.
References
Cheapair.com. (2017). The Best Time to Buy a Flight is 54 Days Out…Or Is It? | CheapAir. [online] Available at: https://www.cheapair.com/blog/cheapair-news/the-best-time-to-buy-a-flight-is-54-days-out-or-is-it/ [Accessed 25 Sep. 2017].
Gill Charlton (2017). ‘Expedia’s confusing website cost me £180 in bag fees’. [online] The Telegraph. Available at: http://www.telegraph.co.uk/travel/advice/Expedias-confusing-website-cost-me-180-in-bag-fees/ [Accessed 25 Sep. 2017].
Shapiro, C., and Varian, H. (1998). Pricing Information. In Information Rules: A Strategic Guide to
the Network Economy. Cambridge, MA: Harvard Business School Press.
Willett, M. (2017). Here’s proof women pay more for the same products men buy. [online] Business Insider. Available at: http://www.businessinsider.com/womens-products-more-expensive-than-mens-2015-4?international=true&r=US&IR=T [Accessed 25 Sep. 2017].
Hi Inge,
You wrote this post very well!
Today I also read the article of Shapiro and Varian about pricing strategies. Indeed, I was wondering too how it’s possible that companies can cheat with prices that much. We both know that the developments in Information Technology are quite new and innovative. Therefore, it could be difficult to create well-thought legislation for these kind of things. It’s unfair that people have to pay higher prices for their products because the seller knows how much money the customer has in its wallet. For example, when people do groceries the service employee won’t raise the price of your vegetables because you are a doctor instead of a cleaner.
Maybe I can share some information with you about the information law. It’s a quite new field in the legal landscape. Since we are increasingly concerned about our privacy on the internet, e.g. our personal data, more and more laws have been made to protect us. In my opinion, there should be a strong legal framework according to these privacy related issues on the internet.
I think for us it should be beneficial if we know more about information law since it’s increasingly important in today’s environment.
Hope I inspired you with my point-of-view.
Kind regards,
Daan Verpalen
I totally agree! It is really frustrating that we can now discriminate just by labelling it “personal” and “customer orientated”. However, I don’t think that we will get to a point where this discrimination will be transparent, as companies use algorithms and machine learning to create these price discriminations; this creates many black box situations, where we and they often cannot hundred percent pin point how these price discriminations work…
But I do wonder, is it ethical to use price discrimination if you know that one person has a higher price sensitivity than the other? Or if you know that one person has a lower economical class? The question that is boggling my mind is: should we treat everyone equally, for the sake of non discrimination and equality, when every one’s situation is different?
Hi Inge,
Thanks for your article and interesting thoughts about price discrimination. I agree with you that it is not fair that varied groups of people are paying different prices for the same products and services. However, this phenomenon is not new, for decades companies have used this approach. For example, in the entertainment industry, where elderly and students get a discount on their movie ticket for the cinema. This is what often is referred to as third-degree price discrimination (Investopedia, 2015).
The same thing happens in the consumable goods industry, depending on the quantity that you buy of some goods, the price changes. Most of the times the price declines when buying more of the same goods, this is what they call second-degree price discrimination. Lastly, there is first-degree discrimination: companies investigate what customers are willing to pay for a certain good (McCormick, 2016). This one is a little more arbitrary, however still legal (if the companies can justify it).
I personally think this is also the case with airlines, regardless of what you think of their actions and behavior they are not doing so much wrong. Look for example to early bird tickets, this could also be price discrimination. I never heard someone complaining about this?
I agree with you that price discrimination should be more transparent and ethical. However, if there are no clear guidelines for companies I don’t think they are the ones to blame. This is something governments need to implement. The second problem about making it more transparent, is that you don’t want to make your competitors unnecessarily wiser.
For now, price discrimination is in my opinion something that is inevitable, the only thing people can do is act by their selves. In the end, there are enough tip and tricks to get better ticket prices, but this is the responsibility of the customer.
References
Investopedia (2015) What are some examples of industries that practice price discrimination?, http://www.investopedia.com/ask/answers/051515/what-are-some-examples-industries-practice-price-discrimination.asp, 25th of September 2017.
McCormick, M. (2016) Why Do Companies Price Discriminate?, Blackcurve, https://blog.blackcurve.com/why-do-companies-price-discriminate, 25th of September 2017.
I think you chose a very interesting topic to blog about. However, following your last paragraph, I agree with T.Y. Wan’s comment that this will never be possible, because the companies themselves often won’t even be able know what exactly the price is based on. The viewpoint of Daan Verpalen on how unethical behaviour in personalised pricing can be countered, is a welcome addition to this blog. I am very interested in how the information law will evolve and whether we will see strong legal frameworks for these cases in the future!
I would like to share with you a different viewpoint on how the unethical behaviour in personalised pricing can be countered. I believe that as consumers we can make a difference:
In the case of corporate social responsibility (CSR), the laws were and still are not enough to really make companies act socially responsible. However, because the consumers value it a lot and buy less and less products from companies that do not care about CSR, companies are now adjusting and CSR has become a hot topic.
I believe that something similar can happen for price discrimination. If customers are aware that companies use price discrimination, they will pay more attention to this when buying things online. Then, when companies get caught using price discrimination in the wrong manner (unethically), consumers can use the same approach as with CSR.
I hope this view-point broadens your view on this topic and am looking forward to more comments with different approaches.